ERS receives and pays for poor advice

By Veryan Allen
Special to the Star-Bulletin

Last quarter, the Hawaii Employees' Retirement System made money, but it made less than 94 percent of its peers. However, in the last six years, how much has the portfolio value and, more importantly, the funded status grown?

Back in 1999, ERS assets were $9.7 billion and today they are just $9.6 billion, despite growing liabilities and regular capital contributions, possibly exposing Hawaii taxpayers to having to fund the over $3 billion that is unfunded, according to the most recent ERS financial report (DOWNLOAD LINK).

You cannot blame the markets. Liabilities grow no matter what stocks do.

An investment consultant's job is to advise on ways to best match rising liabilities and achieve the required actuarial return.

In six years, a competently advised, properly diversified portfolio should nearly double in asset size.

ERS continues to take high risk with a long only, unhedged portfolio when it could reduce risk and properly diversify with substantial allocations to lower risk strategies and asset classes.

The ERS receives and pays for poor "advice" from a conflicted, mainland consultant that appears to lack the expertise to add value to an institutional portfolio in today's investment environment.

Are those advisory fees worth it for such dire results?

Such "advice" also misses money that could be made here in Hawaii. ERS has a fiduciary duty to benefit 100,000 local residents. All of those current and future retirees benefit from a stronger, broader local economy.

Yet, to my knowledge, ERS fails to invest in Hawaii venture capital. California, despite a more diversified economy, receives large venture capital commitments from its state pension plans; many other states invest in local entrepreneurs because of the spin-off and indirect economic effects for their plan beneficiaries.

The case for Hawaii is far stronger, with the obvious informational and due-diligence advantages of investing locally as well as the added portfolio diversification. Investing in local entrepreneurs has nothing to do with so-called social or economically targeted investing; it has everything to do with making money for your portfolio and benefiting your beneficiaries.

Unless something is done soon about obtaining quality consultant advice and properly diversifying the risks in the ERS portfolio, the probability of increasing the burden on Hawaii taxpayers remains high.